Making sense of it all

I think that I am on record somewhere for saying that I would sell everything if the 2s5 inverted. Well, it just did—by a slender margin of 2bp—and for that reason alone, I should have a view. It isn’t easy, though, to add something that hasn’t already been added by the cacophony of comments on the back of recent gyrations in U.S. bonds. If a falling tree in an empty forest doesn’t make a sound, does a yield curve inversion matter if everyone has been talking about it for a year? As it happens, the tree does make a sound, and the yield curve inversion does matter, though not for the reason that you might think. Rick Reider, CIO of the investment manager Blackrock, is a smooth operator, and he delivers the goods in a few tweets. The significance of a yield curve inversion is not about its ability to predict a recession in the U.S., or elsewhere—more about that in a bit—but about the following three points. First, the Fed has some questions to answer; second, an inverted yield is as much a statement of markets’ perception of the Fed’s neutral/terminal rate as it is about its ability to forewarn about a recession, and third; bonds are finally offering a bit of protection for balanced portfolios. This week, I’ll go through each of these points in turn.